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LONDON – The weak hopes that remained that Europe was recovering from the economic catastrophe caused by the pandemic have disappeared as the deadly virus has rapidly spread again across much of the continent.
After a strong expansion in the early part of the summer, the British economy grew much less than anticipated in August – just 2.1 percent compared to July, the government reported on Friday, adding to concerns from that further weakness is coming.
Earlier in the week, France, Europe’s second-largest economy, lowered its forecast for the pace of expansion for the final three months of the year from an already low 1 percent to zero. Overall, the national statistics agency predicted the economy would contract 9 percent this year.
The decline in expectations is a direct consequence of the alarm over the reappearance of the virus. France reported nearly 19,000 new cases on Wednesday, a one-day record and nearly double the number the day before. The increase prompted President Emmanuel Macron to announce new restrictions, including a two-month closure of cafes and bars in Paris and surrounding areas.
In Spain, the central bank governor warned this week that the accelerating spread of the virus could force the government to impose restrictions that would produce an economic contraction of up to 12.6 percent this year.
The European Central Bank’s chief economist warned Tuesday that the 19 countries that share the euro currency may not recover from the disaster until 2022, and those that depend on tourism are especially vulnerable.
Summer feels more and more like a long time ago.
In July, with infection rates declining, closures closed, and many Europeans indulging in the sacred ritual of the summer vacation, abundant signs of revival appeared. Many European economies expanded strongly as people returned to shops, restaurants, and vacation destinations. The most optimistic economists began to celebrate the so-called V-shaped recovery, with a rebound as abrupt as the slide that had preceded it.
Hopes were also fueled by a landmark agreement forged by the European Union to raise a 750 billion euro ($ 883 billion) relief fund by selling bonds collectively backed by all members. That move transcended years of resistance from debt-averse northern European countries, while indicating that the European bloc, not known for its cooperation in the face of the crisis, had achieved a new state of solidarity.
But most economists assumed that better days would only last as long as the virus could be contained. Government-imposed restrictions seemed less important than consumers’ willingness to interact with other people and return to workplaces and shopping areas.
In a report this week, Oxford Economics, a research institution in London, analyzed data across the eurozone, noting that much of the improvement in late summer was the result of factories coming back to life after closure. . For expansion to continue, people have to buy the products that factories make. Willingness to spend is influenced by trust: if people feel safe enough to move; if they fear losing their jobs.
In September, when coronavirus cases rose again, consumption decreased.
“As the health situation is unlikely to improve in the short term, we expect the recovery to slow down again in the coming weeks,” concluded the report, which was written by Moritz Degler, senior economist at Oxford Economics.
The economic slowdown is unfolding just as some European economies are beginning to reduce the extraordinary sums they have spent to protect workers from unemployment, raising concerns about a seemingly inevitable rise in unemployment.
In Britain, the government, led by Prime Minister Boris Johnson, has been aggressively subsidizing the wages of companies affected by the pandemic as long as employers do not fire their workers. The public was covering 80 percent of salaries when the program began in the spring. Even after gradual relaxation, the government is bearing 60 percent of the cost this month.
But the licensing program, which has cost the Treasury 39 billion pounds (about $ 50 billion), will expire at the end of the month. Public finance supervisor Rishi Sunak has expressed concern about the size of Britain’s debts, while vowing to tighten the books. Under a reduced replacement program it announced last month, the government would cover only 22 percent of salaries going forward.
But the rapidly deteriorating economic outlook has forced Sunak to return to the well. On Friday, in anticipation of stricter limits for companies, he announced a new licensing program that would cover two-thirds of wages in companies that must close as virus cases rise rapidly, and which would also increase subsidies. The measures could be particularly significant in the industrial areas of northern England, where increased electoral support for the Conservative Party in last year’s election helped keep Johnson in office.
Fears of declining fortunes in Britain have been amplified by the possibility of the nation exiting the European Union at the end of the year, completing the tortuous Brexit process, without a deal regulating future trade. That would risk chaos that would end employment, especially in ports.
Across the English Channel, the drop has led to the realization that complex hurdles remain before the European Union aid fund can be managed, limiting prospects in worst-hit countries like Spain and Italy. .
Spanish Prime Minister Pedro Sánchez announced a stimulus spending plan worth 72 billion euros ($ 85 billion) on Wednesday, with four-fifths of the money expected to come from the European fund.
Spain may have to wait for that money. The fund is supposed to be operational in January, but it will almost certainly face delays as members of the European Union debate the conditions of its distribution, especially the rules intended to force Hungary and Poland to abide by the bloc’s democratic norms.
The continent’s prospects for recovery are further constrained by rules limiting debts for members of the European Union and restricting spending. Those restrictions have been lifted, but will return eventually, limiting growth prospects.
Italy expects to receive 209 billion euros ($ 246 billion) from the European aid fund, but the government is also committed to reducing its public debt, which exceeded 134 percent of annual economic output at the end of last year. Such austerity, just as the pandemic increases health care costs, will almost certainly plunge Italy into a longer and deeper recession.
